Europe’s economy braces for coronavirus hit as market panic grips

Travellers at an airport in Barcelona, where cases of coronavirus have now sprung up. (Reuters/Nacho Doce)

As coronavirus spirals into a public health emergency in Europe, economists expect a direct hit to the continent’s already fragile economy.

Bank of America on Thursday lowered its 2020 eurozone growth forecast from 1% to 0.6%, putting the 19-member common currency area on track for its weakest growth in six years.

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Before the outbreak spread to Europe, analysts had already said spillover effects from China would dent European growth, due to disrupted supply chains and declining tourism.

Now — as the number of cases swells in Italy, Germany, France, and Spain — they see even deeper damage. Credit Suisse joined Bank of America in cutting its eurozone GDP growth forecast this year, slashing it from from 0.9% to 0.5%.

“Before this week’s sell-off, the majority of investors seemed to have perceived the virus as causing short-term economic damage concentrated on China,” Michael Strobaek, global chief investment officer at Credit Suisse, wrote in a note to clients on Thursday.

“However, as infections spread beyond China to countries such as South Korea, Japan and Europe, this perception has clearly changed.”

The STOXX 600 index (^STOXX), which tracks 600 of the continent’s biggest listed companies, has fallen by more than 7% since the week began. The index is on track for its worst performance in over a decade.

Trade-reliant Germany to take hit

To understand why economists and investors are concerned, look no further than Germany.

The eurozone’s economic powerhouse has only recorded 26 cases of the novel coronavirus, dubbed COVID-19, but is still feeling a chilling effect nonetheless.

“Germany’s strongest trump card has become its biggest vulnerability: its openness and dependence on exports and global trade,” said ING chief economist Carsten Brzeski in a note.

German industry, which is hugely dependent on Chinese-made parts, will suffer as sputtering factories in China disrupt global supply chains. The closure of around a dozen towns in Northern Italy, the country’s industrial core, will also have a knock-on effect.

Domestically, major trade fairs in cities like Frankfurt and Cologne have either been called off or postponed. The cancellations will have a damaging effect on the hotel, airline, and restaurant industries.

Companies are already taking defensive measures. German airline Lufthansa (LHA.DE) this week announced a hiring freeze and offered staff unpaid leave in a bid to keep costs down.